Friday, February 05, 2010

Dean Baker on Social Security: How can he get so much so wrong in such a small space?

It's often said that everyone in Washington is so smart that they skipped directly from 2nd grade to 4th grade. This explains why so many people in top positions don't know third grade arithmetic.

The WSJ gave us another example of this lack of knowledge when it listed Medicare and Social Security as "the U.S.'s biggest budget busters." In fact, those of us who did sit through third grade know that Social Security actually is running an annual surplus. The amount of money it takes in each year on the designated Social Security tax and the interest it collects on its bonds exceeds what it pays out in benefits.

... Social Security is a money loser in the same way as IPOD is for Apple.

First, having looked at the offending WSJ piece -- always the responsible thing to do when one person is ranting about what another supposedly "said" -- we see something strange. The "failed arithmetic" Dean is ranting against is the Administration's, not the WSJ's. Here it is from the story...

Interest payments devour nearly one-tenth of federal revenues ... Spending on Social Security, Medicare and Medicaid consumes an additional 57%. The administration projects that those entitlement programs, as they are known, plus interest on the debt, will absorb 80% of all federal revenues by 2020.

So Dean seems really peeved that the Administration's arithmetic projects these as "budget busters" -- and the WSJ dared report it.

Moreover the year referenced is 2020, not today. He didn't notice?

And there are a bunch more strange things in this one little post:

1) "those of us who did sit through third grade know that Social Security actually is running an annual surplus".

Well, no. Those of us who are alert to facts know that Social Security actually is incurring a shortfallright now. Back when Dean was in third grade they may have projected we'd be running a surplus today, but events have happened since then.

2) Social Security's "interest it collects on its bonds" helps the federal budget? Hello? Who's paying this interest, the Germans or somebody? Dean couldn't possibly be talking about the interest that the Trust Fund credits to itself by bookkeeping entry, because what cash does that provide to help the federal budget??

By the way, these bonds are a liability of the US, part of the national debt. So "crediting interest" to them increases the national debt. That helps the budget?

3) The other side of the trust fund -- they must have taught this too in third grade -- is that all those bonds have to be paid down after circa 2017, with cash funds from the federal budget.

This is going to cost near 2 points of GDP of cash flow -- and the tax increase needed to cover this by itself will be the biggest tax increase since World War II. (Dwarfing the Clinton 1993 tax increase that passed by only one vote in the House and on a vice presidential tie-breaker in the Senate, when both chambers were solidly held by Democrats.)

That, of course, will be on top of all the other tax increases we'll need for Medicare and to service all the trillions of extra debt we'll be ladling on until then, as per this week's latest projections.

4) Social Security has a net unfunded liability on the order of $14 trillion and growing, says the Treasury.

If the iPod was running up an unfunded liability like that for Apple, do you think Steve Jobs would be bragging about how it was helping his budget?

Social Security a "budget buster"? Nah. Who could possibly think that?

But wait, there's more! Dean's bashing is based on people in Washington not being able to do arithmetic, but the WSJ is in New York ... He misspelled "arithmetic" in the post's title...